How to Find USDA Loan Eligible Homes
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If you’re in the market to purchase a home, you’re probably familiar with some of the common financing options, such as the conventional mortgage and government-backed FHA and VA loans. There is, however, another choice that many homebuyers don’t know about: USDA loans.
What is a USDA loan?
The United States Department of Agriculture targets homebuyers in rural areas for its loans. With no down payment required, competitive interest rates and extended repayment terms available, USDA loans bring homeownership within reach to buyers who are challenged when it comes to securing traditional means of financing. The loan programs were established to help maintain and revitalize rural communities.
Ann L’Altrella, a senior loan officer at Fairway Independent Mortgage Company in Shelton, Conn., a company that issues USDA loans, says they are a great option — especially for first-time homebuyers and others who might have difficulty coming up with a down payment. “They offer 100 percent financing and up to 6 percent of the purchase price in closing costs,” L’Altrella said.
With the ability to finance the entire purchase, low up-front and annual fees, USDA loans are more attractive than even FHA or VA loans. Homebuyers looking to purchase, renovate, or build single-family homes under the USDA programs have the following options:
- Direct loans. Aimed to assist low-income homebuyers, these loans are government-subsidized and the USDA offers them directly through its Single Family Housing Direct Loan Program.
- Guaranteed loans. Designed to help low and moderate-income homebuyers, private mortgage companies issue these loans and the USDA guarantees them through its Single Family Housing Guaranteed Program.
In addition to these programs, the USDA also provides grants and loans to repair single-family homes; issues and guarantees loans for multi-family homes; and offers rental assistance, among other programs.
Requirements for a USDA loan
To qualify for either the single family direct or guaranteed USDA loan, the buyer and the property itself must meet specific criteria. Applicants must satisfy the following requirements:
- Because these programs are intended for low- and moderate-income buyers, there are minimum and maximum limits on income, based on your location and family size. To see if you qualify, use the USDA Income and Property Eligibility Site, or view and download the established limits for the direct program and the guaranteed program.
- Both the buyer and co-buyer, if applicable, must plan to reside at the property.
- Prospective buyers must prove their financial capacity to handle the loan. “The core requirement is that applicants be employed at least 24 months prior to the date of the application” said Steven Lacoste, a state office loan specialist for the USDA. In addition, the minimum credit score to get the loan is 640, although Lacoste says most lenders in the guaranteed program look for a score of at least 680 to ensure the loan will close. Applicants that don’t meet these criteria will need to provide alternative documentation.
- Buyers in the direct program must attend a homebuyer education course.
- You must be a U.S. citizen, U.S. noncitizen national or qualified alien.
- You must have the legal capacity to incur the loan obligation and not have been suspended or debarred from participation in federal programs.
- You have to demonstrate the willingness to meet credit obligations in a timely manner.
- You are required to purchase a property that meets all program criteria.
Properties must meet the following requirement:
- They must be located in rural areas.
Homes in the direct program must also meet the following additional criteria:
- They generally must be 2,000 square feet or less (exceptions are made for families of five or more).
- They cannot have a market value in excess of the applicable area loan limit.
- They must not have in-ground swimming pools.
- They cannot be designed for income producing activities.
What exactly is ‘rural?’
If you associate the term “rural” with acres and acres of farmland and assume you wouldn’t be eligible for a USDA loan, you’ll be pleasantly surprised to discover that the USDA uses a much broader definition of the term. In general, rural areas with a population of less than 35,000 are eligible for these programs. You can type in the address of any property at the USDA Income and Property Eligibility website to see if it is considered rural.
Is it as easy as it seems to qualify?
Although there are multiple points of qualifications for USDA loans, L’Altrella says there are two that carry the most weight. “The biggest factors are the income eligibility and the address of the property,” she said. If those criteria are met, the rest of the qualifying process should go relatively smoothly.
How long is the approval process?
The time it takes to process applications for the USDA’s direct program varies based on funding availability and program demand for a particular area. Staffing plays a factor as well, and with many applications coming in per employee, the processing time can take longer, Lacoste said.
Approval time for the guaranteed program varies by private lender. Lacoste suggests prospective buyers call multiple lenders and inquire about their processing time.
Is there a maximum loan amount?
The direct program has a maximum loan amount based on your state and county — you’ll find out the amount when you apply. There is no maximum loan amount in the guaranteed program.
Can I buy a foreclosure or short-sale property with a USDA loan?
Yes, provided the home passes inspection, you can use these loans to purchase a foreclosure or short-sale home.
What are the interest rates and terms of the loan?
USDA loans provide fixed interest rates based on current market rates.
“The interest rates range from 1 percent up to our [current] maximum of 3.75 percent,” Lacoste said about the direct program, with the applicant’s income level and family size determining the exact rate.
“Because of the subsidy feature, if you are in a very-low-income for a family of five, you get the 1 percent payment. Anywhere in between very-low-income [and low-income], our system makes the determination if you pay 1 percent, 1.5 percent, 2 percent, 2.5 percent … up to 3.75 percent.”
The loan term for the direct program is up to 33 years, and there is a 38-year option available for those who cannot afford the 33-year term. Interest rates in the guaranteed program vary by lender and currently range from 4.25 percent to 6 percent. Guaranteed loans are based on a 30-year term.
USDA loans come with an annual fee, currently .35 percent and an up-front fee, currently 1 percent, which you roll into the loan amount, according to L’Altrella. Again, these loans typically require no down payment; but a buyer who exceeds the asset limits might be asked to use a portion of those assets to guarantee the loan.
How to find a USDA-approved home
The process of identifying an eligible property is quick and easy. Visit the USDA Income and Property Eligibility website, select the program you’re interested in, and just type any address to see if it qualifies. L’Altrella mentions that sometimes homes within the same neighborhood have differing status, so be sure the check the property’s specific address.
Getting a USDA loan
If you are interested in pursuing a USDA loan, first determine which program you want to apply for — direct or guaranteed — and then check your eligibility.
To pursue a direct loan with the USDA, you can start the process by contacting your state USDA Rural Development office. A representative will provide you with an application and directions for applying.
If you are pursuing a guaranteed loan, contact an approved lender directly. Not all approved lenders are on the list, Lacoste pointed out. He also said that a homebuyer can cross state lines to use a lender with more favorable terms, provided the lender is licensed to issue loans in your state.
Because interest rates and the application process vary by lender, Lacoste suggests prospective buyers reach out to several potential lenders to compare rates, closing costs and processing time before applying. If you need assistance with the process, you can reach out to your state’s Guaranteed Loan Coordinator.
Buyers looking to purchase a condo with a USDA loan will have separate criteria and guidelines to follow and should contact their state offices for further details. Once you complete the approval process, Lacoste said you will be granted a certificate of eligibility in writing — similar to a preapproval letter — that will last for 45 days while you shop for a home.
An underutilized option
A USDA loan is an excellent option for buyers with limited funds for a down payment or closing costs. With lower fees than other government-backed loans, these programs provide cost-effective solutions to financing.
Because USDA loan programs have not been advertised in recent years, many prospective homebuyers don’t know they exist. And many of those who do know about them assume they don’t qualify. If you’re looking to purchase a home in the near future, check and see if a USDA loan is a good fit for you.